Morningstar Investments Overview

Morningstar Investment Services

Mike Reeves, Regional Director
×
Morningstar Managed Portfolios
404-277-5744

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Third Party Asset Manager:
Mutual Fund Portfolios
ETF Portfolios
Stock Portfolios
Stock/ETF Portfolios

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Turnkey Investment Management Solution
Proposal generation
Investment Policy Statement
Reporting: statements, asset allocation reports, snap shots
Investment Management
Investment Analysis: Portfolio Compare, Monte Carlo Simulator

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What we bring to the table:

Independence

Experience

Reach

Resources

Access

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Our Philosophy

× We invest for the long-term
× We are independent thinkers
× We employ a disciplined, consistent investment process
× We believe in active management
× We are sensitive to costs and taxes
× We invest our clients’ money as if it were our own
× We communicate in a timely and candid fashion

For Advisor use only. Not for public distribution.

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Why some advisors utilize a Turnkey Asset Management
Program?

× Access to consistent well-defined investment management
× Active portfolio construction and risk management
× Sharing of fiduciary responsibility
× Ability to create operational efficiencies and deliver a
differentiating client experience on a repeatable basis
× Create capacity to serve clients better, Time Management
× Focus on your strength & resources
× Build value in practice

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TAMP statistics
► TAMP Assets have grown significantly with $200B+ today versus just $4B in 1994

TAMP users Non-Users
► Worry about delivering high-quality
investment management products and services 5% 75%

► Anxious about market volatility 23.6% 65.2%

► Dealing with compliance and regulatory issues 39.8% 61.7%

Source: CEG Worldwide (Financial Planning)

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Our Mutual Fund Portfolios

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Our portfolios at a glance

Asset Allocation Series aims to meet Retirement Income Series is designed Focused Allocation Series provides
your needs at various life stages with to generate a cashflow stream that will exposure to a specific area of the capital
different risk profiles and return last over a client’s expected time horizon markets, alternative investments, and
objectives. These complete portfolio and protect against the risk of clients global opportunities.
solutions include multiple asset classes, outliving their assets
investment styles, and managers.
The information displayed is for illustrative purposes only. It should not be used to assess the exact risk/return relationship between portfolios. No guarantees can be given about future performance.

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Team of investment professionals focused on you

Morningstar
Financial Advisor Investment
Services

Analyzes your current financial situation Determines target asset mix
× ►

Assists in determining your risk/return
× Evaluates fund performance data to
►
profile peer group and benchmark
Helps you select the appropriate portfolio
× Analyzes, selects, and monitors fund
►
Monitors performance relative to your managers
×
goals and objectives
Creates and constructs portfolios
►
Reviews changes in your circumstances
×
Reallocates and rebalances portfolios
►

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Our Investment Management Process

Risk
Portfolio
Asset Allocation Fund Selection
Management
Construction

Dynamic Asset Allocation Fund Evaluation System Diversified Portfolios Maintain Risk Profile
Strategic Allocation Quantitative Analysis Portfolio Level Monitor
Sets long-term risk and Performance analysis Holdings based analysis Managers
return profile Risk metrics Manage to target risk Portfolio positioning
Diversify across multiple Run screens Fund interaction/overlap Risk factors
asset classes
Qualitative Due Diligence Fund Level Adjust
Tactical Overlay
Interview managers Tailor fund to strategy Rebalance accounts
Over/underweight relative Peruse SEC filings Contribution to portfolio Top-down adjustments
to strategic allocation On-site visits risk and expenses Fund specific changes
Valuation sensitive Evaluate stewardship

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Program benefits

× Access to full universe of funds
× Portfolio management integrity
× Recognized, trusted name
× Scalable & Repeatable Investment process for Advisors
× All the resources of Morningstar to work for you & the client
× Simple communications
× Customized client management
× Responsive service team
× Access to the Investment Team

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Our Absolute Return Portfolio Allocation

Long Equity, 7
Cash, 10
Fixed Income, 10
Commodities, 5

High Yield, 4

Merger Arbitrage, 6
Hedged Equity, 14

Convertible Arbitrage, 16

Long Short, 30

Based on recent allocations to funds that employ these strategies
and positioning and may change over time.

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Building Blocks for an Absolute Return Allocation

× Lower Volatility
× Tighter return spectrum
× Lower Beta vs. S&P 500
× Low correlation to the broad markets

Absolute Return Portfolio has been able to deliver:
× 80% of the upside of S&P 500
× 40% of the Downside of S&P 500

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Alternative Strategies

Convertible Arbitrage: Take long positions in convertible bonds and short
×
underlying common stock. Neutralizes portfolio from beta or equity market risk,
while income from coupons on convertibles and short interest credit are primary
sources of returns.
Covered Call Writing: Designed to generate income from writing call options
×
against a basket of long equity positions. May also use put options to provide
further downside protection.
Long-Short: Take long positions in stocks that manager believes will increase in
×
price while shorting stocks manager believes are overvalued and will decline in
price. Short positions lower beta of portfolio and benefit from down market
environments.
Merger Arbitrage: Buy shares in the target company of an announced acquisition,
×
which will tend to sell at a slight discount to the takeover price due to uncertainty
regarding the deal closing. Hedge position through use of options or shorting
acquirer.

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Our Retirement Income Series: balancing income withdrawals
and long-term growth
Retirement Income Long Range

Recommended Time Horizon in Retirement: 20+ Years
Target Distribution Rate: 4%
Retirement Income Mid Range

Recommended Time Horizon in Retirement: 10-20 Years

Retirement Income Short Range

Recommended Time Horizon in Retirement: 2-15 Years

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Mutual Fund Portfolio Pricing Schedule

Mutual Fund Portfolios Up to $500,000 Next $500,000 Next $1MM Over $2MM
Morningstar Investment Services 0.40% 0.35% 0.30% 0.20%
Advisory Firm 1.10% 1.05% 1.00% 0.90%
Total Annual Fee 1.50% 1.40% 1.30% 1.10%

× Account Minimum $50,000
× Client fee does not include the mutual funds’ expenses
× Advisor fee can be discounted in 5 bps increments

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Our ETF Portfolio Line
URN
T

Conservative Income and Moderate Growth Aggressive
RE

Growth Growth Growth

RI S K

The information displayed is for illustrative purposes only. It should not be used to assess exact spacing between portfolios. No guarantees can be given about future performance.

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The Best of Both Worlds

All the Advantages of ETFs

+
Active
Management


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A “Core and Explore” Approach

Explore Growth

Financial

Health-
Core care
Total Stock

Energy
Foreign
Cash

Retail
Bond

TIPS


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Sample Portfolio

Growth ETF Portfolio Holdings Ticker Weighting Exp Ratio
Vanguard Total Stock Market ETF VTI 28% 0.07
Vanguard FTSE All-World ex-US ETF VEU 18% 0.25
Core

Vanguard Total Bond Market ETF BND 13% 0.11
Money Market 3% 0.48
FMOXX

Vanguard Growth ETF VUG 7% 0.11
iShares S&P Global 100 Index IOO 7% 0.40
Financial Select Sector SPDR XLF 6% 0.24
Explore

XLV
Health Care Select Sector SPDR 0.24
5%
SPDR S&P Oil & Gas Exploration & Prod XOP 5% 0.35
SPDR S&P Retail XRT 5% 0.35
iShares Lehman TIPS Bond TIP 3% 0.20
Portfolio Blended Expense Ratio 0.20

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ETF Rating Methodology

Morningstar Price to Fair Value
Valuation ×
Price multiples: P/E, P/B, P/CF, P/S, Forward P/E
×

Fundamentals Morningstar growth, profitability, business risk scores
×

Costs Expense ratio
×
Bid/ask spread
×

Index Construction Diversification
×
Methodology Weighting methodology
×

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Valuation Example
SPDR S&P Retail (XRT)
Morningstar Price/
Name Weighting % Price Fair Value Fair Value
Office Depot 2.0% $14.43 $32.00 0.45
Chico’s 2.0% $9.95 $18.00 0.55
Petsmart 1.6% $23.14 $38.00 0.61
Macy’s 1.8% $24.93 $38.00 0.61
Walgreen 1.6% $36.00 $50.00 0.72
Staples 1.8% $22.96 $30.00 0.77
Borders Group 1.8% $10.29 $26.00 0.39
Portfolio 0.73

Takeaway: XRT was recently trading at a 27% discount to fair value
×

Source: Morningstar Direct; portfolio weightings as of Jan. 31, 2008; price, fair value data as of February 20, 2008.
For illustrative purposes only; not intended to be an offer or recommendation to buy/sell the above securities

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Benefits of ETFs

× Transparency of price
× Tax efficiency
× Passive diversification
× Great tool for implementing asset allocation strategies
× Protection against cash drag
× Cost advantages

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Competitive Fee Structure

ETF Portfolios First $1MM Next $4MM Thereafter
Total Fee 1.41% 1.35% 1.30%

Morningstar Investment Services Fee* 0.31% 0.25% 0.20%
Advisory Firm Fee 1.10% 1.10% 1.10%

$100,000 account minimum (will accept accounts as low as $50,000 with minimum annual fee of $310)
×
Client fee does not include the underlying ETF’s expenses
×
Advisor fee can be discounted in 5 bps increments
×

*Does not include fees/commissions associated with executing transactions nor the internal expenses of exchange-traded funds. It also does not include the advisory fee.
Additionally, this fee covers costs associated with middle and back-office services such as a trading infrastructure and Participating Client accounting and reporting.

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Our Stock Portfolios at a Glance

× Customized portfolio of individual securities
× Areas of focus: Global Equity, Growth, Value, Small-cap, Mid-cap, Large-cap,
Foreign, Conservative Equity, Growth Equity, Equity Income
× Enables advisor to tailor portfolio to client needs
Accommodate preference for restrictions on sector, industry, or individual stock
×
exposures
Can add Fixed Income ETF’s or Bond mutual funds to balance out the portfolio
×
Advisor can customize asset allocation between Stocks/fixed income
×

× Accommodate current client holdings
× Client can transfer existing holdings for discretionary, tax-sensitive management
× Portfolio can be built around client’s other holdings

× Actively managed to achieve added value
Efficient trading and cost management
×

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Select Stock Baskets Portfolios

Broad Market Global Equity

Market Capitalization Large Cap

Mid-Cap

Small-Cap

Composite Style Value & Core

Growth & Core

Foreign Foreign Stocks traded in the U.S.

Advisor/Client can elect further customization by requesting Fixed Income ETF’s
×

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Strategist Stock Baskets Portfolios

Conservative Equity Tortoise Portfolio

Growth Equity Hare Portfolio

Equity Income Dividend Portfolio

Portfolios with minimum of $100,000
×Model

can elect further customization by requesting Fixed Income ETF’s to balance out
×Advisor
the portfolio. As long as the Equity position meets the minimum.

can elect restrictions on sector, industry, or individual stocks
×Advisor

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Morningstar Stock Research: Focus and key tenets

Look for superior businesses that trade at discounts to our fair value
estimate

× Wait for the “Fat-Pitch”
× Look for wide-moat companies
× Always, always have a margin of safety
× Don’t be afraid to hold relatively few stocks (25-30)
× Find great companies at a discount and don’t trade very often
× Free cash flow is what matters, not reported earnings

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Economic Moats
Every stock we cover receives an Economic Moat rating, which is our assessment of
×
the strength of the company’s competitive position.
We assume that all firms face competitive pressures that, over time, force down
×
above-average returns on invested capital.
Companies with the ability to withstand the competition for very long time receive
×
Wide Moat ratings, companies with a moderate ability to withstand competition
receive Narrow Moat ratings, and companies without meaningful competitive
advantages receive No Moat ratings.
Moat ratings serve two important functions:
×
× Communicate overall quality of firm to investors.
Wide Moat firms are more likely to be great long-term holdings;
No Moat firms are more likely to bear close watching.
× An input to valuation model – the wider the moat, the higher the fair value.
(Assuming similar growth rates and capital needs.)
Equity Research Services Provided by Morningstar, Inc.

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Morningstar Stock Research: Ratings

× FairValue estimate
× Moat rating (Wide, Narrow, No-moat)
× Uncertainty Rating: Low, Medium, High, Extreme
× Stars Rating:
5-4 stars trading at a discount to our fair value
3 stars trading at/around Fair value
1-2 stars trading at a premium to our fair value

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From Analyst Valuation to the Morningstar Rating for Stocks

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Morningstar’s Breadth of Coverage

Analyst coverage:
×
More than 130 analysts
×
Covering more than 2,000 stocks
×
In 130 industries
×
In nearly 50 countries
×
450 firms based outside the U.S.
×

Extensive coverage across market cap:
×
465 large-cap stocks
×
750 mid-cap stocks
×
920 small-cap stocks
×

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Global Coverage

Regional Coverage

North America 1847
Australia/New Zealand 251
Asia 109
Europe 124
Latin America 61
Middle East/Africa 22
2414

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Stock Valuations
This graph shows the price to fair value of the median stock in Morningstar, Inc.’s
stock coverage universe

All-time High Current
52-Wk High All-time Low
Dec. 31, 2004 Jan. 9, 2009
Dec. 26, 2007 Nov. 20, 2008
1.14 P/FV 0.75 P/FV
0.94 P/FV 0.55 P/FV

For illustrative purposes only. Source: http://www.morningstar.com
Past performance is not a guarantee of future results. Data as of Jan.9, 2009. See important disclosures in the Appendix.

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Investment Approach

“The Stock market is a no-called strike game. You don’t
have to swing at everything----you can wait for your
pitch”

Warren Buffett

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Clear Pricing Schedule

Select Stock Baskets Portfolios First $1MM Next $4MM Thereafter
Morningstar Investment Services 0.55% 0.50% 0.45%
Advisory Firm 1.10% 1.10% 1.10%
Total Annual Fee 1.65% 1.60% 1.55%

Account minimum: $100,000 for Strategist Series (Tortoise, Hare, & Dividend)
×
Account minimum: $250,000 Select Custom Stock Baskets
×
Client fee does not include transaction costs associated with custody/clearing
×
Advisor fee can be discounted in 5 bps increments
×

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Tools and Resources

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Comprehensive web platform for advisors

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Client presentation tools (Samples)

Proposal
Client Overview

Client Profile

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Advisor information tools (Samples)

Quarterly Commentary Monthly Portfolio Reports

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Helping advisors help their client’s

× Illustration tools
× Monte Carlo Simulations
× Portfolio Comparison
× Market educational pieces
× Direct communication
× Client write-ups and calls
× X ray and snapshot reports, individual performance
information

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Your Morningstar Investment Services Team
Mike Reeves, Regional Director
404-277-5744 mike.reeves@morningstar.com

Sean Klock, Regional Consultant
877-626-3224 ext. 8 sean.klock@morningstar.com

Stephen Winchell, Service Consultant
877-626-3227 stephen.winchell@morningstar.com

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